Fed chief signals rate hike likely soon

Federal Reserve chairman Janet Yellen said an interest rate hike may be considered on a “meeting-by-meeting basis”, another sign the United States central bank is preparing to end its ultra loose policy.

Yellen told a senate committee that the Fed will consider removing the word “patient” in its approach to rate hikes and entering a phase in which such increases are possible, Reuters reported Wednesday.

The subtle shift helps lay the groundwork for the Fed’s first rate hike since 2006 as early as June.

Investors interpreted Yellen’s testimony as likely indicating a later date for liftoff.

By the end of her two-hour appearance before the Senate Banking Committee, short-term rate futures contracts showed traders had shifted their expectations of an initial rate hike from September to October, according to CME FedWatch.

Yellen said that even as the Fed refines its language in coming weeks, investors should not construe that as a sign the central bank is wed to a rate hike at any particular meeting.

She said, when the word “patient” disappears, it means the Fed will merely have full flexibility to act if its judges the economic data warrants it.

The Fed has been struggling in recent months to move away from the sort of forward guidance it has relied on through the crisis to influence market behavior, without at the same time triggering a market overreaction with each tweak to its policy statement.

Yellen’s comments marked another step in that process.

“If economic conditions continue to improve, as the committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” Yellen said.

“Before then, the committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings.”

Yellen’s discussion of forward guidance was part of prepared testimony that included a broad overview of a US economy that appeared to be surging forward with strong job growth and a continued post-financial crisis expansion — conditions largely consistent with a rise in interest rates later this year.

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